Volatility Ahead - Sainik

The week gone by was characterized by huge bouts of volatility in all the markets, whether stocks, commodities or currencies. This is typical of markets that have run up too fast. What happens next will be interesting to watch.

Focusing on the Indian equity market, for the bulls, the months of November and December are months to look forward to, since the equity markets perform the best during this period. The bears can only wish, that since the markets have run up too fast and everyone seems to be on the bullish bandwagon, the markets may not favor the bulls.

If we observe the market movements in the past three weeks, the market seems to have been hovering around in a range with violent movements. Everyone seems worried about the liquidity being sucked out due to the Coal India IPO, but thankfully this has not happened.

Everyone now seems to be waiting with bated breath as to what will happen to the refunds of the IPO. Many in the media are speculating that a significant portion of the money would come trickling into the secondary market. It would be interesting to watch first week of November onward as to where the money would go.

The results season has produced many surprises for the analysts. While Infosys played to script, TCS really took off in terms of performance. As expected, Wipro reported less than stellar earnings.

The cement sector actually came with poor earnings, yet surprisingly the scrips shot up after the earnings. Perhaps the market had already factored in the poor results.

The strange bit of earnings to hit the markets was that of L&T. On the face of it, its earnings were better than expected and much higher than last year's comparable quarter. But, the devil was in the details. They had included the proceeds of the sale of Satyam Computer shares in their other income. Strip this one time gain, and then lo and behold, earnings were lower than last year, a point that has been missed.

This week, we will have a rash of earnings and it would be interesting to watch how they would pan out, and more interestingly, how the markets react to them. This week is also settlement week and one can expect volatility going forward. Point to note is that this is the first time in many months when the Nifty and Sensex are trading at the mid point of the monthly range.

The undertone of the market is very bullish, especially for the month of November, with the premium on November Nifty futures more than 60 points to the spot, which is a record since futures were introduced more than a decade ago.

Many respected market commentators and fund managers are all looking at targets of Nifty between 7000 and 7300 and Sensex of 25,000 to 28000 in the next few months and they are basing it on the projections of the earnings of Sensex stocks.

The consensus earnings for 2010-11 are 1050 /1080 and for 2011 -2012 is 1350/ 1400.

If we consider these estimates, then Sensex at 20,000 comes to around 17 times 2011 earnings and 14 times 2012 earnings. The only problem with these earning estimates is whether they are reasonable and backed by facts.

I am not tired of repeating that the Sensex earnings for 2009-10 were in the region of 820 and to get to 1080 for 2011, the earnings should grow at more than 30 percent year on year for two consecutive years.

On analyzing the results of the companies for the last 2 quarters, there are only a handful of companies, predominantly in the banking sector (which does not have a high weightage in the indices), that have come anywhere near the magic figure of 30 percent, year-on-year growth.

At such times, I am reminded of Bernard Baruch who said: “Every man has a right to be wrong in his opinions, but no man has right to be wrong in his facts.”